Private Equity Fundraising sets up a Tough 2023

As fundraising challenges persist in the private equity market, managers seeking new capital are expected to see an even tougher year in 2023.


These additional challenges could confront private equity managers across almost all fund sizes and strategies, said Clay Deniger, the chief executive of Capstone Partners, a private equity placement agent owned by Mizuho. As a result, firms could take longer to reach the finish line when raising funds.


Data in PitchBook's Q3 2022 US PE Breakdown shows fundraising already down from last year's strong pace, with midsized PE funds and emerging managers seeing the biggest declines.


Through the first three quarters of the year, PE managers closed 143 vehicles with fund sizes between $100 million and $5 billion, raising a total of $119 billion, according to PitchBook data. That compares to $197.4 billion across 268 such vehicles during the same period last year.


Emerging managers have also experienced slower fundraising. There are 42 first-time funds that have closed $8.5 billion in capital through the first three quarters, a pace unlikely to surpass last year's tally of $18.4 billion.


One constraint facing LPs is the so-called denominator effect, triggered by the decline in public asset valuations this year. Some LPs had to cut back on investing in private fund managers or free up their capital through secondary sales of fund stakes because their holdings of private assets exceeded the allocations allowed under their mandates.


There is an expectation that the denominator effect will continue to weigh on private markets, reducing the gross amount of institutional capital available for alternative assets in 2023, according to Jason Strife, a senior managing director at Churchill Asset Management, which invests in middle-market PE funds.


"As public markets are down, there could be the denominator-effect dynamic impacting certain pockets of capital on the LP side," Strife said.


With the scarcity of capital being supplied, LPs may pull back commitments to new relationships and instead double down on their existing relationships.


“Finding new relationships in a challenging fundraising market is the hardest thing to do," Deniger said. "It's much easier to get commitments from investors who've invested with you in the past. Emerging managers or lower middle-market strategies that are looking to add LPs can be those that face the biggest challenge."



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